Home is where the mortgage is

Robert Marsh recently evicted from his home by Start Mortgages. Photo:Leon Farrell/Photocall Ireland

One of the first poems Irish children of my generation learned in school was Padraic Colum's “An Old Woman of the Roads.” It's a simple but moving poem in the voice of an old tinker woman who is tired of living on the lonely roadsides in the wind and the rain.

She longs for a little place of her own so she can be dry and warm. She dreams of a stool by the fire, a ticking clock and a dresser of shining delph.

The poem, written almost 100 years ago, is so famous it's on the Internet now and will pop up when you search the first line: O, to have a little house!

Time has moved on, but a century later it's a sentiment shared by so many Irish people, who like the security of owning their own homes.

In contrast with many people in France or Germany, for example, who are happy to rent all their lives, most Irish people aspire to owning their own place. It's something that probably has historical roots (years of colonization and tenancy).

Colum's famous poem may be a bit old-fashioned now -- "the pile of turf against the wall' -- but it has a new relevance here today given what's happening on the home ownership front.

The poignancy of the poem about the old woman dreaming of a roof over her head is in tune with the mood in many houses in Ireland right now, with families struggling to hang on to their homes and fearful of what may happen if they fail.

It's been called the hidden third part of our economic crisis. First part is the budget deficit, the massive gap between our taxes and our spending. The second part is the billions the banks lost to property developers and speculators which the Irish state has taken over to stop the banks going bust and which made our national debt so huge we needed the bailout from the EU and the International Monetary Fund (IMF).

And the third part, only now becoming fully visible, is the huge problem in domestic mortgages.

With all the talk about the first two, the deficit and the banks, the domestic mortgage crisis did not got much attention up to now. But it's been bubbling away under the surface of the financial collapse for months.

And it's now become headline news after a Central Bank report revealed that well over 10% of mortgages in Ireland is in difficulty, with people either falling behind on payments or only keeping up through a restructuring of the loan terms. The Central Bank report said that more than 7% of all mortgages are in arrears for more than 90 days. The number of homeowners falling behind in their repayments has jumped sharply this year and the situation is getting worse.

There are also another 70,000 people (including couples) who have restructured their loans with their banks, extending the time frame of the loan or paying interest only for the time being. The banks are reluctant to do this, of course, but getting some money is better than nothing.

All the indications are that we have a huge problem, made up of the tens of thousands of individual people who can't pay, or are really struggling to pay, their mortgages. If they go under, the loss goes back to the banks.

Estimates of how big the overall problem is vary from €6 billion to €10 billion or even a lot more. Since the banks that gave out the money in mortgages are in deep trouble themselves, the bill would end up with the government and ultimately the taxpayer. Depending on how big the problem is, it could even mean we will need even more EU-IMF money to deal with it.

The money is not the worst part of it, of course. There is the human cost involved, the worry as the bills mount and the mortgage goes unpaid, the fear of losing your home and ending up on a housing list or even on the street.

How did we get into this situation? Property prices here rose year after year during the decade of the boom.

People piled in and paid high prices for apartments and houses, confident that within a few years the rising market would make their expensive homes look like a bargain. Except that it hasn't worked out like that.

What has happened is that someone in Ireland who bought a modest home for, say, €300,000 in 2006 or 2007 now finds that it's worth €150,000 today.

The Irish banks and building societies (savings and loans) were so keen to lend money during the boom they gave people loans that were 95% or even 100% of the price of the property. Even though the apartment or house may now be worth only €150,000, the person with the mortgage may still owe the bank close to €300,000.

It's called negative equity. This means that you can't sell and pay off the mortgage.

In the U.S. most mortgages are "non-recourse,” which means that the lender can't go after you if you give the keys back and say that's it buddy, keep the house. The legal position with mortgages here is that you still owe all of the money.

Negative equity is a major concern for many people here -- it's reckoned that at least 200,000 people (or couples) in Ireland who bought homes during the boom are now in negative equity.

They still have to make the repayments on the original loan, even though their house may have halved in value. That's a very tough place to be, but legally there's no way out.

Negative equity itself is not the core problem, however. There are many people in negative equity and they are still paying their mortgages. The real problem is inability to pay.

The stagnation in the economy after the boom means that many people have lost their jobs or had their pay cut or are on short time. Two income homes are now single income, or even no income apart from welfare. So they can't pay their mortgages.

People with big mortgages who still have jobs also find they are struggling because they haven't got the increases in earnings they were expecting. So people fall behind, they miss payments, they look for interest only deals and so on.

All of which is a huge problem for the government. The Minister for Finance Michael Noonan told a Dail (Parliament) committee two weeks ago that the government is waiting for a report from an expert group before deciding what to do. He insisted that the government wanted to see as many people as possible staying in their homes, even if they ended up renting instead of buying.

The crisis has led to widespread calls for "debt forgiveness" for people who can't keep up mortgage payments. This would mean the banks would write off part of the debt.

But it's not as simple as that. For a start, it would be very difficult to limit to those who really are in dire straits.

Let's say there was some system of debt forgiveness for mortgage holders in trouble, and let's say you are behind on your car payments, your credit card payments, the kids’ school fees and your mortgage.

What are you going to do? You're going to pay everyone else and let the mortgage mount up so you can benefit from mortgage debt forgiveness.

The other problem is what the economists and lawyers call moral hazard. If you see someone else in similar circumstances to yourself getting debt forgiveness, why should you continue to make big sacrifices so you can make the full repayments on your mortgage? It would not seem fair, or moral.

So any widespread debt forgiveness is going to cause difficulties. There is also the fundamental problem that if it's a widespread debt forgiveness program, it's going to cost a fortune ... and someone has to pay the bill.

So far Noonan has not revealed exactly what he is going to do. He pointed out that the banks had been recapitalized by the state (with billions from the EU and IMF) and that mortgage arrears had been part of the calculation when this money was put into the banks. It was up to the banks to deal with the problem, treating each case on an individual case, he said.

But the banks are having it both ways. Having got the recapitalization money, they are now holding on to it instead of using some of it to allow for mortgages that cannot be repaid. Instead of forgiving debt they are pursuing people for the full amount of their loans.

There is some anecdotal evidence that in really hard cases the banks are doing deals, agreeing to take interest only for a few years, or extending the time frame of the loan and thereby reducing payments or even in a few cases agreeing to write down the debt to an affordable level.

But the banks won't say on the record that they are doing this because they fear opening the floodgates. To emphasize this point they are still taking some people to court and repossessing homes.

Where this is going to end is anyone's guess at the moment. Debt forgiveness is complicated because, as Noonan, there are those who can't pay and those who won't pay.

It may make sense to forgive some of the debt for those who can't pay. But separating them from those who won't pay is not going to be easy.

One thing is sure. Putting 50,000 or more individuals, couples or families out of their homes is not going to solve anything.